Late Edition

Citigroup on the Ropes

Nothing really new here, but the music is about to stop and Citigroup doesn't seem to have a chair. The government will likely provide one, but what shape will it take is an open question. I think an AIG shape makes sense, i.e. shareholders and officers largely wiped out. Otherwise, too much moral hazard. At least we did not allow Citigroup to buy Wachovia. Then the price tag would be much higher. Then again, there is a theory that the FDIC financial support for the Wachovia deal with Citigroup was a secret means of financially backstopping and saving Citigroup and had little to do with supporting Wachovia. In any event, Bronte Capital (by an Aussie) covers the current mess and, as I recall, did a nice piece on the Citigroup/Wachovia reasoning at the FDIC. He knows his stuff.

http://www.bloomberg.com/apps/news?pid=20601087&sid=a3ArjWNoRSKw&refer=home

http://brontecapital.blogspot.com/

Enjoy Cheap Gas While It Lasts

Oil companies are apparently storing millions of gallons of oil in tanker ships just waiting for prices/demand to increase. I don't think they would do this, and pay for the ships, if they thought curent prices would hold for an extended period. I mentioned yesterday that prices "rationally" would not likely go much lower, but who knows whether they might climb from here. If the oil companies know, then prices are about the rise. I wonder whether it would pay for me to install a few 10,000 USTs in the back 40 for gas and let it roll?

http://www.bloomberg.com/apps/news?pid=20601087&sid=a3ArjWNoRSKw&refer=home

Twenty Down ___ To Go

If you follow the flow, bank failures pretty much always happen on fridays , unless there is a political reason for them to happen on another day. True to form, we are up to number 20 for the year. Nothing major, but the recession beat goes on.

http://www.fdic.gov/news/news/press/2008/pr08123.html

Update: The FDIC closed three banks yesterday. While the number of insistutions closed is small in comparison to the S&L crisis, the dollars at issue are larger. For a good discussion of this, with cool charts, visit Calculated Risk.

http://calculatedrisk.blogspot.com/2008/11/graphs-fdic-bank-failures.html

Peace, Love and Serenity! Or not.

The Sun Will Come Out - Tomorrow

I am on an unexpected day off so plenty of time to write, and there is a lot to write about. I've decided to interrupt my usual bad news assortment of reports with a few things I view as a positive. Of course, whether something is positive or negative relates a lot to your perspective, as we have seen. For example, gas being cheap is good from most people's perspective, but not if you are an oil company.

Hedgesville

I have seen various sites that give names to hedge funds and/or the hedge world. I am choosing Hedgesville. My great grandfather lived in Hedgesville, literally. Hedgesville, West Virginia, which is tucked in between Berkeley Springs and Martinsburg. He, poetically, built caskets in Hedgesville. From the looks of things, quite a few hedge funds are needing a good casket right now. So far, this perhaps does not sound like good news.

Well, it turns out that hedge funds have already mostly exited their equity holdings and deleveraged a bit. Now just 17% in equities. This is a good thing as increasing redemptions by investors in hedge funds would otherwise continue to put a lot of pressure on equity markets. Hedge funds should, instead, have hopefully enough in cash to meet redemptions. And a few hedge funds going under, is also probably good news, especially if you build caskets in Hedgesville.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aKg2AIyWF5kk&refer=home

Bottom?

I don't know about all the technical analyses, but there are some people I follow who do, and one seems to think we are getting pretty darn close to a bottom. He at least sees a market that has a bright future ahead and that is near historic lows on various technical bases. He begins with a nice discussion of Black Swans, and the book on that topic written by Nassim Taleb. I have read Taleb's book and recommend it. An important part of the attached article is that financial institutions do not properly model for rare but extreme situations. Their models consider these to be virtually impossible, yet they happen and more often than you would think. The good news is that technical indications are that we are near a bottom - or at least in a place where there are some nice values. Not really a secret, but good to see someone with sophisticated technical analyses saying so.

http://deadcatsbouncing.blogspot.com/

Black Swan

The thing about Black Swans, rare unpredictable events, is that they can be bad or good. Sure, it is easier to imagine a one time event that has a negative impact, but there can be Black Swan events that have a positive effect. These typically take longer to have an impact, but sometimes they can happen quickly. Imagine someone finding (for real) the secret to cold fusion tomorrow. I am not expecting one but it can happen.

Think green. With the Democratic Administration and Congress, there will be a new push to green, as in alternative fuels, recycling and the like. Low fuel prices will lessen the desire to go there but it will happen much more than it has the past eight years. If the U.S. can develope the next best alternative fuel (which will likely be numerous different things) then we have a whole new industry or industries to drive our economy. This makes good environmental sense and business sense. I doubt it will happen in the next few years, but it will happen.

http://money.cnn.com/2008/11/19/magazines/fortune/serwer_stocks.fortune/index.htm?postversion=2008112020

In the interest of full disclosure, I have a few hundred dollars invested in an algae company. I think algae has great prospects as it can be grown in areas where food crops cannot be grown, it can grow in the worst imaginable water, it is up to 50% oil, and it is carbon dioxide neutral because it takes in as much growing as it releases when burned. Win/win/win in my book. Still some technical hurdles to overcome and probably a decade away, but very promising. Did I mention it is renewable. The oil from it can be converted and burned in diesel engines. Right now it is not cost effective with oil, but given its other benefits, it may make sense to pay the extra $.

Any hoot, don't pollute!

Fly In My Ointment

On the auto industry Chapter 11 idea, one aspect I did not consider, but that needs consideration, is the impact on CDS protection of GM, Ford and Chrysler debt. If the restructuring is done in such as way that most of their debt is still good and gets paid off, it may not be terrible, but the bankruptcy filing will undoubtedly trigger the CDSs and lead to them being settled. Even if they only pay out a few cents on the dollar, keep in mind that there are trillions of dollars worth of CDSs out there. I have no idea how much of that is on the (not so) big three, but would guess it is substantial. You do not actually have to have any exposure to the company to buy the CDS, so the amount can easily exceed their respective debt. Letting them simply fail would be much worse on the CDSs as then the payout will be significantly higher, but the knock on CDS effect of Chapter 11 versus a cash infusion needs to be considered.

For another take on this, and why Chapter 11 will not work, you can read the article below. I, however, think that if the government is back-stopping the process, Chapter 11 will not significantly impair sales beyond their already dismal status. Best to get it done now when there are no sales to be had anyway, so that they can reemerge bankruptcy by the time the economy rebounds.

http://www.zacks.com/stock/news/16024/What+to+Do+About+Detroit?

BOO!!

I just saw this and wanted to post it right away. I know Halloween is over, but if you want a good scare, this is the article to read. It draws parallels between the current recession and the "Real" Great Depression of 1873, seemingly much worse than the Great Depression of 1929. Scary stuff and well worth the read. One point to take from this is that highly capitalized companies could well be the big winners in the long run. When they feel it is safe to use the capital, expect a lot of mergers and acquisitions, well beyond what we have already seen in the financial sector. So do some research and find those well capitalized companies that are hiding in the wings.

http://chronicle.com/temp/reprint.php?id=477k3d8mh2wmtpc4b6h07p4hy9z83x18

Ask The Airlines, Bankruptcy Isn't So Bad

Finally, somebody is paying attention (not to me, I am sure, but I can dream). The Obama team is considering a pre-pack bankruptcy with government financing support. Not their original idea (or mine for that matter) but who cares, it is probably the best route to saving the car industry. They may ultimately decide that all three cannot survive in this environment, who knows, but this is a step in the right direction, in my opinion. We will see.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aRfqFMhlj5lk&refer=home

By the way, the above Bloomberg article notes that prepacks might take 6-12 months whereas normal Chapter 11 bankruptcies can take 2-5 years. Properly done, this it true, but this could be a messy prepack, given all the creditors, unions, vendors, etc. I have been involved in numerous prepacks and they rarely wrap up in less than a year. I have had some go three to four years. One I am involved in right now, has been going on for several years and the debtor just filed its 12th or 13th amended plan. Rare, I admit, but it can happen. I don't expect a GM prepack will resolve quickly, but the company can continue to operate while it gets resolved - so long as the government continues to finance the operation. This will not be cheap, but it is cheaper than the alternatives.

Credit Anyone?

The three month Libor, interbank credit rate, rose today. Not a big rise, but certainly not the direction we want to see it going. Given the market the past few days, hardly a surprise.

http://www.bloomberg.com/apps/news?pid=20601087&sid=awedRkrRZ4SQ&refer=home

No, You Are Not Dreaming

The stock market is not just a bad dream, it is happening. If the S&P stays where it is or lower, this will be its worst annual decline ever. 483 of the 500 stocks in it have declined this year, so if you were not fortunate enough to pick the lucky 17 that did not decline, you suffered as well. The index is now down 49%. I remeber telling a friend of mine that it is not unheard of for stocks to go down 50% or more in a recession. His jaw dropped like a rock even though he had lived through some of these recessions.

There was, after all, a 49% drop in the S&P when the technology bubble burst, but that took over two years. And if you focus on the Nasdaq instead, you may recall that it was once over 5000, but closed yesterday at 1316, roughly a fourth of what it once was.

Nonetheless, this time around is notable for its depth and speed. More or less a perfect storm has come together that will make it longer and deeper than probably any recession since the Great Depression. Virtually all sectors are suffering at the same time. The last couple of times consumers got us out of the mess by spending, but this time consumers are on the ropes too. They have way too much debt, their piggy banks (otherwise know as homes) are empty, they have job losses mounting and overall are not in a spending mood. You have, as a result, retail suffering at the same time that manufacturing is suffering at the same time that financials are suffering at the same time that real estate is suffering and so forth and so on. Pretty much everyone but WalMart and McDonalds is suffering. This alignment of the stars just does not happen often, but it is happening now and it is happening on a global basis.

But you need to keep in mind that what is happening can be referred to as a correction. The economy was broken. It seemed wonderful but it was on an unsustainable trajectory. Coming back to earth, i.e. reversion to mean, is painful but necessary. Hard to believe, but what is happening now is a good thing.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aC9BtxtnWsiA&refer=home

Did I mention, in the not suffering category you can squarely put Lockheed. Seems military spending is one area not in the dumps these days.

http://www.bloomberg.com/apps/news?pid=20601109&sid=aDFPQX31NCTY&refer=home

Why Bother

Goldman is recanting its $200 a barrel oil prediction and basically saying it is no longer predicting where oil will go. While oil traders are supposedly furious, if they still believed the $200 a barrel prediction now with it under 25% of that call, they are in the wrong business.

http://www.nakedcapitalism.com/2008/11/goldman-recants-its-200-barrel-super.html

This is so typical of analysts. They wait until a stock has already fallen 80% to switch their recommendation to a sell recommendation. At that point, however, unless you think the company is at risk of going under, you might as well hold. And if you think it will recover when the economy recovers, there is that nice cost averaging thing you can do where you might actually take advantage of the decline.

Barry Ritholtz, who is a frequent guest on financial talk shows, and who has been calling things pretty well in this recession, makes the same point here in a good bit more detail (with nice charts).

http://www.ritholtz.com/blog/2008/11/belated-downgrades/

"and another one down, another one down, another one bites the dust"

Gonna get you too. Singapore is now the third Asian economy officially in recession, close on the heels of Hong Kong and Japan. Did I mention that decoupling thingy?

http://www.marketwatch.com/news/story/Singapore-falls-recession-cuts-2009/story.aspx?guid=%7B81BD9818%2D1469%2D4D7B%2DA8A1%2D4C13592A2E47%7D

Land of Opportunity - Late, Late Evening Post

One last parting shot. There will be few times in your lifetime when the deals that are available now are again available. Sure, some companies will go under. Figure out the ones who will not (absent an absolute meltdown) and have faith. If there is an absolute meltdown, money won't matter much. If there isn't, and I firmly believe there will not be, then this is truly the land of opportunity.

Sure, plenty of companies (especially financial) will not return to their prior plentiful ways as those ways were a house of leveraged cards, but they do not need to go all the way back to make their stock look cheap. Stay away from those on the edge. There are plenty of very solid companies down significantly and they will pay out royaly in the long term. I have one third of my retirement money back in equities and have lost a third of that in the past couple of weeks, so my next move is to put another third back in this week or next. Catching the bottom is like catching a knife, but this money will be invested for decades and I do think we are facing a once in a lifetime investment opportunity (for those with a fairly long horizon). Just thought you may want something not so doom and gloom.

If you have a fairly long term horizon, it is time to get excited!! This is the land of opportunity!!!

But don't think I will now stop reporting the negatives. Knowledge of the markets and what is driving them is the key to a secure financial future. There will be loads of bad economic news ahead and I will seek to put the significant pieces here, but this post is meant to emphasize that all is not bad. I don't recall which language it is but in one language the word for problem (or something like it) is also the word for opportunity. I agree with this - as I think does Warren Buffet. We have major problems right now so that means major _________? You fill in the blank.

Ugly, Uglier, Ugliest - Evening Edition

Here is a bit more to add to today's pile of news. Hedge fund redemptions continue at a near record pace. The fact that this is nearly as bad as September is quite telling as redemptions in September were triggered in part by funds that only allow redemptions on a quarterly basis. Those are out of the equation for redemptions in October, so nearing that mark for September is, well, telling. Anyhoot, the good news, if the attached is right, most hedge funds have already cashed a lot of their equities in and are sitting on cash. Then again, after the last couple of days, I think maybe a few hedge funds are still selling left and right.

http://www.nakedcapitalism.com/2008/11/hedge-funds-investors-withdraw-record.html

Repeat

Asia down again. What's new?

I did not see that coming

Okay selling pieces I saw, but the prospect of Citigroup putting itself on the block, I did not see. Bankruptcy yes, on the block no. But hey, who in the world is going to buy them. Not even their friend the Prince can afford that in these times and, frankly, if they are in such dire straights, who would want to buy them. After all, they have a lot of problems. Then again, JP Morgan seems willing to buy almost anything. But wait, I'm sorry, they were down over 17% today, so I guess they are not in the mood at the moment. What about Bank of America, they buy everything JP Morgan doesn't. No, they were down almost 14% today, so they are not likely to want more crap. Who does?

http://online.wsj.com/article/SB122722907151946371.html

This Market is so Ugly That if I had a Dog That Ugly I'd Shave His . . .

Well that toe I stuck back in the water last week got bitten off. Which just goes to show you, don't go sticking toes into shark infested waters. Man that hurts. The S&P is now poised for its worst annual drop EVER! And Calculated Risk is saying this is the most severe market crash since the Great Depression (as I mentioned yesterday, however, we have fallen further faster this time than the Great Depression). Oh well, it's just money. So what caused today's turmoil? Let me make a few guesses.

Unemployment Posting Big Numbers

Initial jobless claims climb a good bit more than forecast to 542,000 in the week ending November 15th. That brings us to a 26 year high (other than one blip in 1992). That is a good bit higher than the previous week's 516,000.

http://www.bloomberg.com/apps/news?pid=20601087&sid=anVS4Mooik1I&refer=home

And with more layoff announcements daily (JP Morgan laying off about 3000 announced today), this will get worse before it gets better.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aM0sF63PMJN0&refer=home

Fortunately Congress approved a $6 billion jobless benefits extension that Bush is expected to sign.

Prince Alwaleed bin Talal Ain't Got No MoJo

The Prince announced he was raising his stake in Citigroup today from 4% to 5%, which is 54 million shares. Obviously, that had a significant impact on the stock today - NOT! Or perhaps it did. Stock was down 26% today, putting it down over 90% from where it was at the beginning of 2007. Mind you Alwaleed invested heavily into Citigroup's predecessor when it was on the brink of bankruptcy, back in 1991, and that helped make him at one point the fifth richest man on earth, but that was back when Citigroup, his largest holding, was trading over $50 a share. Today it closed under $5.

http://www.bloomberg.com/apps/news?pid=20601109&sid=a3pNjAm3wGxM&refer=home

CDS Insanity

CDS rates are setting new records, showing enhanced concern over corporate defaults. What happens when concern goes up over defaults? Credit dries up even further. That slow thaw that started after the $700 billion bailout was announced is pretty much stopped. So what will Ben and Henry do now? Ben will probably cut rates again, but with the rate already down to 1%, that's not going to provide any help to this market. The rate cuts to date have pretty much done nothing.

http://www.nakedcapitalism.com/2008/11/credit-defaults-swaps-peg-corporate.html

Misc.

- Philadelphia Manufacturing Index at its lowest since 1990

- Bay area median prices off over 40%

- Treasury yield to record lows

- VIX back above 80

On The Brighter Side

Oil closed under $49 a barrel, which should lead to gas prices under $1.75 a gallon in certain areas. I filled up yesterday and it was $1.95 here in New Hampshire. We are nonetheless having a colder November than average and there is no relief in sight, so we could see inventories dropping a bit in the U.S., which could slow this dive. It is probably about as low as it will go, but that assumes it maintains a rational level and nothing these days is rational.

Evening Edition

A lot of posts today but a lot of not so positive news coming out, lest you did not know from the big market drop.

Still bad headlines at Bloomberg. Really nothing to be real happy about, other than we are closer to the elusive bottom, wherever it might be.

•Asian Stocks Slump, Extending Global Rout; Toyota, Nintendo Lead Declines
•Fed Members Saw Slower Growth, Threat to Price Stability at Latest Meeting
•Japan's Exports Drop Most in Seven Years as Global Recession Intensifies
•Buffett's Berkshire Drops Most in 23 Years Amid Broader Financial Sell-Off
•S&P, Dow Drop to Five-Year Lows as Banks, Carmakers Slide; Citigroup Falls
•Amgen, Takeda Suspend Trial of Motesanib Cancer Drug After Rise in Deaths
•Barclays Sues Ritchie Hedge Funds Over Investment in Failed Petters Group

As evidenced by Berkshire losing the most in one day in 23 years, even Berkshire is not immune. If you had just one share of Berkshire class A shares today, you lost over $11,000, or 12%. I once read where Buffet said he would like to see all his holdings go down over 50% tomorrow as that would create so many opportunities for the capital he has on hand. Wonder if he still feels the same way.

Long run he will probably make out like a bandit, but I suspect he is not all smiles today. He uses his sterling reputation to get good deals. Goldman and GE not only needed capital from Berkshire, they needed Buffet's vote of confidence. Once the Buffet name starts to tarnish, so does his ability to strike the rich deals he has of late.

I noted yesterday the stresses in Berkshire's CDS rates. For more on Berkshire's problems (more credit ratings than anything else), here is a nice piece from Felix Salmon. As he notes, being so dependent on your triple A credit rating to maintain your edge on the competition is probably not wise - though many companies would like to have problems like this.

http://www.portfolio.com/views/blogs/market-movers/2008/11/19/will-berkshire-lose-its-triple-a

Not a pretty chart

Calculated Risk has a new chart well worth the view. It shows that we have dropped further, faster than in the oil crisis in 1973, the dot com crisis in 2000 and - ready for this - than the Great Depression. Yes, the Great Depression drop was a lot larger, but at this point in the time line, the market drop in the Great Depression was around 40% whereas we are now at 48.5% this time around. During the 1973 drop it took about a half a year longer to drop this far and during the dot com bubble pop it took over a year longer to get here. So if you are feeling this seems worse than past recessions, you are not off your rocker. Nouriel Roubini has an interview on Bloomberg where he talks about all the significant factors coming together in this recession and he predicts it will the be worst in 50 years. Go to Bloomberg and check it out. It is about 6 minutes.

http://calculatedrisk.blogspot.com/2008/11/four-bad-bears.html

More on CMBS, though really just more detail on the woes I noted earlier.

http://www.reuters.com/article/bondsNews/idUSN1933428520081119

China, Did I Mention China - I may have said something about China. I think I did.

It seems China is having some fairly significant job loss issues and the government is taking measures to stem it, but it is hard to create jobs out of mid-air. Job loss in China makes job loss here seem small in comparison - number wise, not percentage wise.

http://news.bbc.co.uk/2/hi/asia-pacific/7735205.stm

http://www.themalaysianinsider.com/index.php/business/12457-chinas-workers-head-home-jobless

You Thought It Was Just TheBig US Three

China auto manufacters (did I mention China) are in dire straights - and here you didn't even know China had car manufacturers. They too are seeking a few alms for the poor. Isn't everyone? Not everyone, but the folks not seeking bailouts is an increasingly short list.

http://www.themalaysianinsider.com/index.php/business/12457-chinas-workers-head-home-jobless

Night all. Tomorrow is another day.

Too Many Holes, Too Few Fingers

I think Bernanke, Paulson and Bair are to the point where they are kicking their shoes off so they can use toes to plug some of the holes in the economy. They are apparently resisting attempts by the big three U.S. car manufacturers to plug that hole. Worked so well to let Lehman go under, why not the auto industry too! We can double our unemployment numbers over night. Just think how well the market will react if that happens. I do think they need to go bankrupt, but without government support any bankruptcy will convert to Chapter 7, which is not in our best interests. Chrysler even confessed that it looked at the Chapter 11 prepack route but it was not viable - likely due to an absence of DIP financing.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aNUr0y4tunTM&refer=home

Singin' Those CMBS Blues . . .

Another hole that seems to be developing rather rapidly is commercial mortgage backed securities (CMBS). The housing lag started before the commercial real estate lag by several months. Commercial real estate, however, is now rather rapidly playing catch-up with problems of its own, be it hotels with low occupancy, office building with a shrinking tenant base, malls with stores liquidating or simply a pull back in construction. Calculated Risk covers the real estate side of things well and provides nice graphs to boot. This will simply add to the woes of financial companies.

http://calculatedrisk.blogspot.com/

And the Architexture Billings Index indicates that the future of commercial real estate is going to be quite painful for a while. It hit a record low last month from when it began in 1995. According to Calculated Risk, this indicator leads commercial construction by 9-12 months, i.e. this suggests commercial real estate construction will be significantly weaker next year than now, which will simply add further strain on CMBS. More pain ahead . . .

http://www.aia.org/ABI_Oct_08_111908

Good News Bad News

As is commonly the case, economic news is both good and bad, depends on how you look at it. Housing starts were at 791,000 in October, the lowest since records bagan in 1959. If you are a builder of homes, this is a bad thing (for now). But over the long run this moves us closer to the bottom as it will help to reduce the months of inventory. If you are trying to sell a home, this means less competition, which is a good thing. We still have a major oversupply of inventory, but a lot of that is due to foreclosures and foreclosure sales will help to bring prices down further, which is also a good thing (overall).

Again, the prices do need to fall further. I own a home and don't like it one bit, but the sooner we get housing stabilized the better. And we will not get it stabilized until prices revert to the mean, which they have not done yet. When they do, then all we have to worry about are the thousands of other holes in the levy.

http://www.census.gov/const/newresconst.pdf

Another good news bad news point is the record drop in the consumer price index (CPI) last month. Down a full 1%, the most ever in a single month. For consumers, this is good news (to a certain extent). We have more spending power, assuming our wages stay the same. For the companies selling the goods, perhaps not so good as they "may" have thinner margins due to price drops. I say "may," as a lot of this comes from continuing drops in fuel and commodities. Lower fuel prices helps most businesses and lower commodititis helps manufacturers to make things more cheaply. Fuel and commodity producers are taking it on the chin, but they had one hell of a great summer, so time to share the pain a bit.

But wait, there is a bad news aspect of this CPI drop that we need to discuss; this signals what some economists have been fearing - deflation. Why is deflation a bad thing? I will allow someone else to explain:

http://www.google.com/hostednews/ap/article/ALeqM5iYwB5yO5SxYP2KXGaD8TzRYofP8wD94HHQI00

But as we often see, nothing in economics is ever truly just a good or bad thing:

http://economics.about.com/cs/inflation/a/deflation_2.htm

What if they stop buying Treasuries?

I raised this prospect before and will undoubtedly need to again; we are dependent on the good graces of foreign countries to buy our Treasuries and fund our deficit spending. Next year will be especially telling as our deficit spending will shatter records. Last year foreign governments and central banks bought, I believe, around 40% of the Treasuries sold. But some of these countries, like Japan and China, have their own problems to worry about. And they see U.S. Treasuries as increasingly a bad investment, especially when we are buying far fewer of their goods than before. At a minimum, if they expect the dollar to devalue in the future, and most do, then why buy Treasuries now in U.S. dollars only to be paid back later in devalued U.S. dollars?

http://www.nakedcapitalism.com/2008/11/japanese-float-idea-of-treasury-selling.html

Remember last month when California sold bonds to help pay off its debt. It ran a fairly large advertising campaign aimed at getting citizens to buy the bonds, and it worked. I suspect in addition to Obama Bonds, noted in the article above, the U.S. might need to do a bit of advertising itself. Despite the economy, there are a lot of people with capital to invest and who would like to support our efforts at avoiding a melt down. Moreover, U.S. investors are not impacted by the devalued dollar issue as there is no currency exchange needed. Either we are going to be support the government through buying bonds or support the government with a tax increase. Let's see, low yielding fairly safe investment versus paying more taxes, which do I prefer?

That Bear Seems Awfully Hungry

Another bad day in the market. You can attribute it to the car manufacturers on the ropes or the CPI number dropping a record amount or record low housing starts or poor commercial real estate numbers or any of the dozens of other bad news items out today, but I link it to Paulson. He said that the U.S. has "turned a corner" in averting financial collapse. Given his track record on the economy and predicting how well we are doing, this is equivalent to an automatic sell trigger. I would not be surprised if some brokers have such triggers built into their computer systems. Paulson seems rosy today, sell, sell, sell!! For some of his rosy predictions, I refer you to Financial Armageddon, where yesterday Michael Panzner provided a few.

http://www.financialarmageddon.com/

Anyhoot, the S&P is closing in on being down 50% from its high mark. One more day like today and it will be there, so we could make it there tomorrow (hope not). This puts us squarely in keeping with other crashes, like the oil related crash of 1973 and the dot com crash 2002. If it breaks the 50% drop mark, it will be worse than these other two crashes for the S&P. Today it closed at its lowest level since 1997. Still well off from the Great Depression crash, but not far enough to give me much comfort.

"Strong and Stable"

Remember way back when - I believe last week - that Pandit at Citibank said they were strong and stable? If you call you stock price reaching a 13 year low strong and stable, then I guess you define these words a bit differently than I do. Could be worse, however, as GM's stock price hit its lowest since 1942. Of course, for GM, the stock price is not their biggest issue at the moment. There's that brink of bankruptcy thingy staring them in the face.

Buffet on the ropes?

Not really. He still has loads of cash, loads of companies and loads of intelligence. Nonetheless, his CDS rates, i.e. rates to buy credit default swaps protecting Berkshire Hathaway ("BH") debt, are near those of much lesser companies. Actually, that is an understatement. It is near or below those of much, much, much lesser companies. So why?

Well, according to Bloomberg it is due to some derivatives on the S&P 500 that will not pay out until 2019 at the earliest. From what I know, CDS contracts only go out five years, so you would not likely have a default within that time, but they are OTC, so the counterparties can negotiate different terms if they desire. Alternatively, if the S&P goes down too low, or stays down too long, or BH has a ratings downgrade, then there is the prospect of BH having to post collateral. Still, this should be drop in the bucket for BH. So the cost of their CDS protections seems to me a bit silly. Then again, I don't do that dance, so what do I know. I am not so sure why protecting $10 million in BH debt would cost nearly half a million a year for five years (math majors, that is almost $2.5 million) but perhaps someone else has an idea. Anyone out there know? Really, either of you have an idea?

http://www.bloomberg.com/apps/news?pid=20601087&sid=awMIhCcHAcXU&refer=home

GEEEEEEEE

In the interest of full disclosure, I have some GE stock, which I bought this week. I read an article yesterday predicting GE has too much debt to survive. I hope not. Yet, they are doing some downsizing (who isn't) and other changes to cut costs and boost capital. Time will tell.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aJd9ubB_EQSA&refer=home

Train Keeps Rolling - Evening Edition

Two posts in one day. What a bargain for the price. Keep in mind, however, that you get what you pay for.

A friend of mine (hat tip Chris) clued me into an article in the WSJ on how it might be a good idea for GM to go through Chapter 11. Something along the lines of what I said last Friday. Admittedly, their piece had more details than mine, but I came out with mine first. So take that WSJ.

China, did I mention China?

Troubles continue in China, as they do everywhere.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aOmQD.vNWK_E&refer=home

So much for the old decoupling philosophy. Decoupling, if you do not know, is the general phenomenon in which the interactions between some physical objects (such as elemantary particles) disappear. Okay, that is a physics oriented answer, but it does correlate well to the economics side of things. I know that decoupling, even in economics, means a wide variety of things. In the context I am using it, it means the U.S. can sneeze and Europe will not catch a cold. In other word, despite massive globalization, we remain economically independent. One country fails and the rest do not care. The economist debate is whether the developing countries of the world are decoupled from the U.S., the EU and other developed countries.

For a bit of entertainment value, here is an article from March of this year in The Economist. The article is titled "The Decoupling Debate." The first line is precious - "As America's economy struggles to stay aloft, the developing world is learning to spread its wings." I guess the decoupling debate is over. Unless you have not been reading this blog, The Economist (and the submerging economies, as well as developing economies) had the losing side in that debate.

http://www.economist.com/finance/displaystory.cfm?story_id=10809267

Yahoooooy

I don't recall the movie but it involved time travel and the guy going back in time was not allowed to say anything that might alter the future. He told his best friend one word before returning to the future and it was "Yahoo." Needless to say, this was before Yahoo existed and his friend was clued into buying into Yahoo when it first came out. The guy in the movie made a fortune. Hopefully he sold...

Yahoo not doing so well these days and their rebuff to the Microsoft offer may have been the proverbial nail in the coffin. Well, at least it was for CEO Yang. Seems he is stepping down. And before you welled up with a tear for the guy, note he is just 40 and a multi-millionaire. For someone who blew a great opportunity for his company, he is doing fine. I wish someone would pay me a lot to make stupid decisions. If my boss is reading this, please note that you do not yet pay me enough for stupid decisions.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aItPLtoIBHW4&refer=home

So where is the market heading tomorrow? If the past few days are any indication on the direction, the answer is BOTH. More ups and downs than, well, I had a non-PG thought in mind but won't go there.

Want to get Depressed?

Of course you do, why else would you be reading this blog. Seriously though, I am looking forward to the day when I can report all is well, full steam ahead. But until then, hey, things could be worse:

http://www.boston.com/bostonglobe/ideas/articles/2008/11/16/depression_2009_what_would_it_look_like/


http://online.wsj.com/article/SB122670920936930089.html

And with that depressioning thought, good night.

The Recession Train Keeps Rolling . . .

Remember just last week when Citibank said its revenue is "strong and stable" and its capital is "plentiful?" Well, tell that to the 50,000 plus employees it just announced it is laying off. That is after letting 23,000 go this year. Sounds really strong and stable to me.

Seriously, is it any wonder that financial institutions are not loaning out money? There is absolutely no credibility in this crowd. Now I know that Citibank stock took a drumming last week, but making foolhardy statements like it did then only to follow up with a massive layoff this week is not going to help them in the long run. I am not saying anyone believes anyone out there right now anyway, but that is not an excuse to fan the flames with more idiotic statements.

http://www.bloomberg.com/apps/news?pid=20601087&sid=amJDipAa2oNw&refer=home

Four Out of Five Economists Recommend Running Like Hell

Getting economists to agree on anything is a challenge. Some say inflation while others say deflation. Some say throw money at the problem others say let the free market economy correct itself. So when 96% of the economists surveyed agreed that we are in a recession, that is truly amazing. I wonder what the other 4% are drinking.

http://money.cnn.com/2008/11/17/news/economy/nabe_survey/?postversion=2008111707

Manufacturing Slump. Are you surprised?

The New York Fed manufacturing index set a new record low at minus 25.4. Mind you, the records only go back to 2001, so the new record is not that incredible. This just confirms what we have been seeing. Manufacturing - and pretty much everything else - is off the cliff. Deere, Caterpillar and Alcoa, all down - again, like pretty much everything else. And there does not appear to be much relief in sight in the short to medium term.

http://www.bloomberg.com/apps/news?pid=20601087&sid=a.Q5z6xlZSo8&refer=home

There was an overall climb in the U.S. in industrial output, but Bloonberg is attributing that to refineries and oil rigs coming back on line after the hurricanes. Still, up is better than down.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aJ_htC7sLMaE&refer=home

Balance? Nah . . . Screw Balance

The cost of living "probably" dropped the most in 60 years last month. I say "probably," as Bloomberg says "probably" and likes to listen to economists' predictions, which are never right, and report them as if they are self-fulfilling. They are undoubtedly right on the direction of thngs. It is a demand/supply thingy. Demand craters and prices drop. Not all that difficult to appreciate. So low prices are a good thing, right? If you are buying and can afford to buy, certainly. Yesterday I saw gas under $2.00 a gallon. To me, that is a great thing, and it is just what the consumer needs.

But low prices are not particularly good for the seller. Take Russia, for example. The low oil prices are causing a good deal of economic turmoil. They saved some money when prices were high, but an extended downturn in oil prices, say below $70 a barrel, can have rather severe repercussions on the Russian economy - as in beyond the already dire economy they already have right now. I for one don't want to see a country with nuclear weapons and long range missiles become desperate. As it seems, we need a bit of balance. Severe swings in either direction have consequences, both good and bad.

Nonetheless, as a consumer with nothing to sell, screw Russia, I am liking my cheap gas!!

http://www.bloomberg.com/apps/news?pid=20601087&sid=aTxtStJrKGr0&refer=home

Need an Auto Loan? GM, Ford and Chrysler Do.

There seems to be a little discontent in Congress over loaning the auto companies $25 billion. Not everyone thinks it is a good idea. Senator Shelby for one thinks bankruptcy is a better option. As he says, "companies fail every day and others take their place." His sentiment is not irrelevant as he is the senior Republican on the Banking Committee. While I do not totally disagree, I have different reasons behind my thinking.

The auto industry has way too much luggage to survive. Pension issues and heavy wage issues are dragging them down. I have heard - though cannot substantiate - that $1500 of every car they sell goes to pension funding. But they provide too many jobs to simply let them fail. Mind you Senator Shelby, a new auto company providing tens of thousands of U.S. jobs is not going to happen over night. These jobs will be gone for a long time and the entity filling the void might be less American than we desire.
Yet we have airlines doing the Chapter 11 debt car wash seemingly daily. They emerge, get back into trouble, perhaps merge with another ailing airline and then back to Chapter 11. So why not let the car companies wash away some debt?

One problem is that debtor in possession financing, i.e. loans needed to fund the bankruptcy process and come out the other end, are hard to come by right now and the auto industry will undobtedly need a lot of them to get through. Perhaps the Fed should loan them the money to fund a bankruptcy. Let them go through the process and reduce or eliminate some of their burdens. I realize that this will be difficult for their employees, as they may get the short end of the stick, but better a short stick than no stick at all.

Why not just loan them $25 billion and be done with it? Win/win, right? If you think $25 billion will be enough, then you think AIG is doing just fine. It seems to be a common practice these days to get the government on the hook and then continue to reel them in for more and more money. We taxpayers do have a big "sucker" sign on our foreheads at the moment.

Toast Anyone?

The U.S. consumer is toast. Consumers in other countries are not much better off, but they are probably more like croissants or tacos or dumplings. To each their own carbohydrate.

I know you do not want to hear me go on about this at length, so I will revert to letting my old pal (not really) Noriel Roubini do it for me. He is a professor of economics at NYU and has been one of the persistent doom and gloom guys. To his credit, he did see this coming. Unfortunately, his predictions have proven true too often. And he says we (consumers) are all toast. He also has over 20 reasons why. Not pretty, but these days not much is pretty.

http://www.nakedcapitalism.com/2008/11/roubinis-latest-why-things-are-hopeless.html

Hope to post more later but time to play with my daughter.

Baltic Dry Goods Index is Toast

I have mentioned here before - I think just yesterday - that international shipping is a wreck. No letters of credit available or at least none that financial institutions will honor. The cost of shipping has fallen so far that a lot of shippers are simply letting their ship sit idle. You lose money much slower that way. Yet, as I said before, global shipping coming to a sudden halt is not a good thing. People will start starving if food cannot be shipped. We need balance here and the balance is all out of whack at the moment.

http://www.nakedcapitalism.com/2008/11/yet-more-trade-finance-worries-not-for.html

Join the Club

The EU is in a recession. Gee, what a surprise. Two successive quarters of GDP contraction. First time ever for the EU. Perhaps we should have a coming of age party. The drum beat continues . . .

http://www.independent.co.uk/news/business/news/its-official-eurozone-collapses-into-its-first-recession-1019870.html

Misery loves company

Not to be out done by the EU, Japan is also now officially in recession. Wow, I never thought they ever got out of recession. If you look at the Nikkei for the past 15 years, you will know what I mean. Still a few major world economies, if not all the major world economies, in recession at the same time is truly amazing.

http://www.bloomberg.com/apps/news?pid=20601087&sid=ae8VSIqazc.Y

Let me say it now. This is not investment advice, because things could get worse and individual companies could easily tank in the next few years, but overall there are a lot of great deals out there. I have my toe back in the water and am looking for good bargains, which are not that hard to find. Decide for yourself. To go in now you need a long horizon as we have a lot of ups and downs ahead (more the latter than the former). I have faith we will emerge the other side, but it will take time, probably lots of time. The question is, when do your get in? I don't know the answer. You have to decide for yourself but some stocks are stupid inexpensive right now, so if you are 30 something and planning on retirement, you have to have a smile on your face. Okay, you may have just lost a lot of money but you are cost averaging down so get over it and enjoy the (perhaps slow) ride back up. If you are twenty something, now is a time to do two or three jobs at a time and put as much as you can spare in the market. Seriously, market lows like we have now are a once in 20-50 year encounter. Take advantage. I am. If you are 20 something you will thank me some day.